"Power Deals Demand Professionalism"

Attorney at Law GANDHI PANDIT has established himself as a lawyer specializing in hydropower and foreign investment sector.

Sept. 26, 2014, 5:45 p.m. Published in Magazine Issue: Vol: 08 No. -8 September. 26- 2014 (Ashoj 10, 2071)

Attorney at Law GANDHI PANDIT has established himself as a lawyer specializing in hydropower and foreign investment sector. Advocate Pandit, who teaches at Nepal Law Campus, did his LLM from Columbia University, USA. Founder of Gandhi and Associates, Pandit spoke to NEW SPOTLIGHT on various issues related to foreign investment. Excerpts:

How do you view the investment prospects in the hydropower sector in the present circumstances?

When you talk about the hydropower development in Nepal, the prospect and opportunity of investment and development are always there. A more important question is: have we been able to capitalize the opportunity and prospect? In the last five decades or so, we have been developing hydropower on a piecemeal basis. This means that the political parties and bureaucratic channels had not looked at hydro power development with a holistic perspective.

What do you mean by that?

When you talk about hydropower, it is not only one aspect or one issue. There are several issues involved in it. For example, the signing of PPA is one of the major issues. The recently signed Power Trade Agreement (PTA) with India was a very important step.

Are they enough for hydropower development?

On top of that, one of the most important aspects we are missing is the project financing agreement and development of project financing regulations and laws. Due to this, there is delay in project implementation.  This is a major issue in developing hydropower. Another major aspect we are missing is the Power Development Agreement (PDA). That is where we missed the train.

How important is the Power Development Agreement (PDA)?

Without signing the PDA, no developer will make investment. This is the reason a large number of projects, which signed PPA with NEA, are not investing money. Had we started signing PDA along with PPA, Nepal would have generated more power than we have now. We have wasted almost four years just negotiating PDA with GMR on Upper Karnali Project. It is similar with Satlaj on Arun III hydro power projects.

Is signing the PTA a panacea?

Without signing the PTA with India, nobody would come to implement hydropower projects, no matter how many PDAs and PPAs are signed with private investors. Nepal would not be able to develop hydropower. Although Nepal and India have already signed PTA, the question remains there as regards investment. What we are still missing is development and implementation of project financing.

How do you look at Nepal's existing legal regime for investing in power and other sectors? Are they investment friendly?

If you have a drunken driver, no matter whether it is BMW or Benz car, he will meet an accident at one or the other point. However, if you have a genuine driver, he can drive any type of car safely. Laws alone cannot guarantee safety of foreign investors. Of course, there are certain lacunas and weaknesses; but there are laws and regulations dealing with foreign investment in Nepal.

How do you see the enforcement mechanism?

Enforcement mechanism and institutions related to protection of foreign investment are weak and unpredictable.  There are three most important elements hampering Foreign Direct Investment in Nepal. They include ambiguity in laws, unfavorable bureaucracy and weak implementation mechanism. With this scenario and negative attitude of bureaucracy, bringing foreign direct investment in hydro power and other sector has been very difficult.

Many people had argued earlier that investment in hydro sector is impossible without signing Power Trade Agreement with India. As Nepal and India have already signed PTA, how do you see the possibility of FDI in power sector?

After the recent visit by Indian Prime Minister Narendra Modi to Nepal, expectations of the investors and people have gone high and signing the PTA has brought positive signs. In almost 18 years, Nepal and India came to a logical conclusion by signing the PTA, which will allow traders and developers of both the countries to export and import energy without any hurdle. This is a very good start but signing the PTA does not invite investors. This is a major breakthrough but there are still many more breakthroughs to make.

After the signing of PTA, what are the reasons to stop mega hydropower developers to invest in Nepal?

Let’s talk about Upper Karnali and Arun III projects in which two Indian companies Satlaz and GMR are there. They want PDA for development without having PTA. For Indian companies, PTA is not their matter of concern to sell their power to Indian market. As India is in dire need of power, these two companies can easily supply their power to India. PTA is important for Nepalese and other foreign investors to export power to India.  This PTA will help Nepali, American, Chinese and other companies invest in Nepal’s hydropower sector with a target at the Indian market. Along with this, the PTA will also help Nepal to import more power from India to avert the present power crisis.  Signing the PTA, Indian market is now opened for Nepalese and other foreign investors.

Although there is a great opportunity for Indian companies to produce power to export to India without any difficulty, why are these companies not developing the plant?

I have good experiences to share as to why foreign investors, including Indians, are not coming in Nepal.  In order to develop a hydropower project worth one billion dollars, a developer needs to seek the funds for it. Hydropower projects are costly and involve high risks. For instance, more than a couple of billion dollars are required to construct a mega project. In the power sector investment, the developers and those who get the license and all other permission for the work to build the project, are involved. However, a developer does not necessarily have the enough money he or she will invest as 20 or 30 percent equity.  He or she will go for lenders or bankers for the remaining investment. And that money will come from foreign countries as Nepalese do not have the capacity to develop hydropower projects worth more than 30 MW. When we talk about the export oriented projects, all the money will come from different multinational banks.

Does Nepal have any project financing law right now?

We don’t have any project financing laws at the moment. These are of two kinds: recourse project financing and non-recourse. Bigger hydropower projects are developed under non-recourse financing. Nepal Rastra Bank, Nepal’s central bank, can only do the recourse financing. Under this provision, the developers not only give their project as collateral but also give the company and everything they have as guarantee. If the Project Company fails, it will have effects on the balance sheet as well as on developers.  This is risky. In many other countries like India, China, Laos or Cambodia, the projects are developed under non-recourse financing.

We have been talking about hydropower development for the last 40 years, why is no one coming?

Except the involvement of the government, no private parties have shown interest in investing in mega, export oriented, projects. Foreign bankers are not lending money because they are not part of the PDA. Developers never know the interest of the bank. The bankers look at whether the project is viable or not. Only after they see the viability, they will invest in the project. They also want guarantee whether the developer will pay back or not. Banks also want assurances that if the developer fails to pay the money in six or seven years, can they control the plant in their hand? For all these arrangements, you need to have a very special laws and policies. In non-recourse funding, they will not look at the collateral of the developer. What they want to know is the collateral of the project or DPA as DPA is a main document of project. They also want to see whether the PDA can be implemented.

What is important then?

There is the need to have a secure and separate transaction law for the movable property. It is easy to handle the movable property, but it is very tricky to handle the immovable property. When you develop bigger projects, there is equal possibility for loss and profit. Lenders want complete security of their investment. Banks and lenders also want to ensure return of their investment even in the case of failure of project a few years after operation. 

After going through your statement, what one can see is that there is a secure transaction law in Nepal. Is it right?

Because of lack of law and project financing and ensuring the return of investment, no foreign bankers are coming to Nepal despite signing PPA. They don’t want to put their investment in risk. First thing, we need to have a law to allow or facilitate the foreign investor to have a law to create conducive environment including security to their investment.

Is this also applied to hotel sector?

Yes. Every hotel in Nepal is coming under recourse financing. Why not non-recourse financing? In any investment, some risk is involved. It is not that all the investments pay back; there is also equal possibility of failure.   If you lose under the recourse financing system, it will have impact on other projects and industries also. They will be declared bankrupt in case of the failure in one project. This is the reason nobody is coming to Nepal to invest in bigger projects. There is the need to have a project financing law to give assurance to investors that their investment is safe in Nepal. For instance, Three Gorges, a Chinese company , agreed to develop West Seti. But, it is yet to come. They said recently that they will not invest the money without giving guarantee of purchasing power. In the last twenty years, except t he government’s investment, no private parties came to invest in big or mega projects because of this.  This is very valid demand that give us sovereign guarantee. Why they are asking because three Georges does not have money and they have to go to bank for loan. In this case, bank wants confirmation that the project will return their investment.  Most of the bigger investors are demanding the sovereign guarantee.

Does Nepal have such laws?

Since there is no proper law in place to give sovereign guarantee, bankers are reluctant to invest in Nepal. Before coming to invest in Nepal, the bankers like to know what is the legal system and regime to guarantee their investment. Although the government has been saying that there are proper laws, regulations and other systems to guarantee the investor a conducive atmosphere, the reality is different. Whether it is the fast track or major hospital, school or power project, if Nepal gives sovereign guarantee, then you can see a lot of foreign investors. I have attended several talk programs and workshops and everybody talks about Nepal’s potentiality and prospect but it is unfortunate that nobody is talking about this part of the legal system in Nepal.

What is the state of repatriation law?

As per the foreign investment act, any investor who invests money through the banking channel, they are allowed to repatriate their investment in foreign currency, including dollars. The government has guaranteed the repatriation.

Another important part in the project is how to manage the risk in the dollar fluctuations. All the investors want their investment should be guaranteed by dollars. For instance, when one signs the PPA with NEA with the dollar rate of Rs.72 and suddenly the value of dollar increases, there will be differences in the amount involved. Who is going to bear the risk? Nepali currency is very weak and it is depreciating every day. Repatriation is no problem but the problem is the risk involved in the exchange rate fluctuation.

How can Nepal avert the situation like that of with Bhote Koshi and Khimti?

The cases are about how Nepalese bureaucrats handle the agreement.  Signing PPA on dollar with Bhote Koshi and Khimti was not wrong but what was wrong with Nepal was failure to send competitive lawyers and negotiators to negotiate with competitive lawyers.  It is the failure of NEA’s bureaucrats, who handled the negotiations with professional lawyers from developed countries to make the negotiations in NEA’s favor. They cannot blame Bhote Kosi and Khmti for their failure.  PPA was signed after long negotiations. However, NEA did not hire professional lawyers with the capability to deal with competitive lawyers.  Had NEA been very smart, it would have hired a good lawyer to make the agreement in Nepal’s favor.  When Khimti and Bhote Kosi signed agreement, the rate of dollar was in the range of 50 and NEA officials failed to visualize the future scenario. However, the other side did it. That is the matter of professionalism and competitiveness of the lawyer.  Had NEA taken a stand in sharing the risk in fluctuation of dollar, the situation would have been otherwise.

How do you look at the recent debates and decision of NEA not to sign PPA on dollar?

What I can say is let god save Nepal. If NEA does not sign PPA on dollar, no foreign investor comes to Nepal.  How can we imagine that one can invest money in dollars and agree to sign PPA on Nepalese currency? It is another foolish step.  One day our policy makers might say, we want to buy petroleum products in Nepalese currency.  The question is will the sellers sell that way?  Nobody will come here to take Nepalese money which does not have international credibility.  We are inviting the foreigners not because they are good and nice people but because they have money to invest.  If we have enough capital, we don’t need to invite the foreign investors. If we invite foreign investment, we should give guarantee them they can take back their profit in foreign currency. The question only is to share the burden of currency fluctuation.  Can we develop Upper Karnali on our own?

Investors are complaining that there are flaws in laws. How do you look at this?

Every country signs agreements and negotiations protecting their own interest. However, honoring the agreement is different.  Investors take a look at Nepalese laws before coming to invest in Nepal. Only then do they make the decision. The problems with Nepalese is that they don’t honor the agreement they sign. The difference between Nepalese and European and others is that Nepalese sign the agreement without thinking about the future. However, European and other western investors sign the agreement only after reading, internalizing and negotiating it.  Nepalese sign the agreement and start debate after it. As Nepal’s legal reliability is in question, the arbitration is made in Singapore, Hong Kong or other developed countries.  Nepalese are losing the arbitration cases because Nepal signed weak agreement.

How do you see signing the PPA in dollar?

I was recently invited by the Public Accounts Committee of the Legislature Parliament seeking my opinion of variation and other issues like PPA in dollars. I told them that signing PPA in dollar is not bad as long as there is the clause to share the risk of dollar fluctuation. Similarly, variation is essential part of any agreement but there must be the clauses which protect the interest of the country.  International bidders are so smart that they always put the clauses which favor them in variation.  If one hires good lawyers, the clauses will be made to favor Nepal.

Why such mistakes are happening then?

One of the unfortunate parts of Nepal is that others correct the mistakes once they know it and Nepalese repeat the same mistake. Whether one talks about Chameliya or Melamchi, it was the mistake of Nepalese. Even if we don’t honor the agreement, the concerned party will go to arbitration. Nepalese have the tendencies to sign the agreement but they rarely bother to honor them. We need to make our bureaucracy capable and Nepal should hire expert lawyers in dealing with future agreement.  I was often hired by international agencies to make the agreement in favor of Nepal.  Had NEA learned the lesson? I don’t think it has learnt.  We can also talk about Nepal Airlines.

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